"Access and investment structure are crucial for alternatives"
Date: 20. June 2022
- Institutional Investors
- Institutional Funds
Covestro is increasingly focusing on alternative investments along with attractive returns, greater diversification and maturities that match liabilities.
In this interview, Peter Martaller who is responsible for asset management at materials manufacturer Covestro that was spun off from Bayer in 2015, talks about their strategy and why his team opted for a German-structured 282 AIF fund.
universal spotlight: Mr Martaller, you are responsible for investments and pension assets at Covestro and you decided to invest in alternative investments, alongside traditional asset classes. What was your motivation for your decision?
Peter Martaller: Our reasons for doing so are quite complex. On the one hand, yields on bonds were very low. On the other hand, the additional diversification through illiquid investments also played a role. In addition, we have liabilities with very long maturities and wanted to see if these could be matched better on the investment side through illiquid investments. A guiding principle for us is cash flow driven investment, i.e. investing in assets that can help us service our pension obligations without the need to sell assets.
Which types of alternative investments are we talking about? And what are the key points to note about this asset class?
We are currently focusing on three asset classes, although there may be more in future: real estate, infrastructure and private debt. In real estate, there is a strong focus on Europe, and we have diversified across many sectors. In infrastructure, our focus is on renewable energies, such as solar or wind parks for both, new and existing projects for diversification reasons. In private debt, we focus on classic corporate direct lending, and avoid real estate and infrastructure loans.
How has the share of alternatives in your portfolio developed and what has been your experience with this asset class so far?
We have started investing in alternatives about four years ago and the share of alternatives in our portfolio is steadily increasing. How an investment is made is enormously important: building exposure to alternatives cannot be implemented as quickly and easily as it can be done for liquid asset classes. Access is crucial, whether you implement the investment directly or through an advisor. We have opted for the latter. The second important point is the investment structure. Which fund vehicle is suitable? Which platform should be used? We took our time with both decisions.
At the moment, a lot of investments are going into alternatives. What do you think the prospects are for this asset class?
Alternatives are a heterogeneous asset class, so making a general statement is not possible. Valuations are certainly already high in some cases. We approach this issue through diversification across asset classes, regionally, sectorally and also by spreading our investments over time. We could invest even faster, but we are deliberately holding back. Irrespective of this, we are convinced that in the long term the risk-return profile is better on the illiquid side than on the liquid side.
You decided to implement your alternative exposure using a German-structured 282 fund, i.e. an institutional AIF, and decided against a fund launch in Luxembourg or Ireland. What was the reason for this and what exactly is the construction of the fund?
The decision for using a relatively new vehicle – the 282 AIF fund – was a conscious decision made by us as we wanted a German investment structure. At this point, Universal Investment is one of the few ManCos (KVGs) that was willing to implement this requirement through a 282 AIF fund. Our goals for taking this route were to achieve uniform regulation and simplification on the tax side. This structure also reduces the need for coordination on the operational side.
We have placed the 282 AIF fund within our CTA assets (Contractual Trust Arrangement). There we have set up a fund for three illiquid asset classes and formed theme funds for our investment network, both for the old pension plans and for the newly implemented pension plan in 2021. Alternatives are therefore also part of our new life-cycle-based pension plan, for optimising returns. In addition, there are three more theme funds on the liquid side.
2021 had a very turbulent start due to the pandemic. In 2022 the situation came to a head with the Ukraine war. What does that mean for you, especially with regards to alternatives?
We certainly cannot completely escape these issues. But it is precisely in such situations that alternatives can stabilise the portfolio. As far as energy is concerned, we are glad that we have put our focus on renewable energy in the infrastructure sector. We are now benefitting from this development.
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